The Constitution of the United States of America: Analysis and Interpretation
Chapter 22 : Also, a State may impose a tax upon the net income of property, as distinguished from t

Also, a State may impose a tax upon the net income of property, as distinguished from the net income of him who owns or operates it, although the property is used in interstate commerce;[720] also a "franchise tax" measured by the net income justly attributable to business done by corporations within the State, although part of the income so attributable comes from interstate and foreign commerce;[721]

also a tax on corporate net earnings derived from business done wholly within the State may be applied to the income of a foreign pipeline corporation which is commercially domiciled there and which pipes natural gas into that State for delivery to, and sale by, a local distributing corporation to local consumers.[722] Indeed it was a.s.serted that even if the taxpayer's business were wholly interstate commerce, such a nondiscriminatory tax upon its net income "is not prohibited by the commerce clause," there being no showing that the income was not on net earnings partly attributable to the taxing State;[723] but a more recent holding appears to contradict this position.[724]

MISCELLANEOUS TAXES AFFECTING INTERSTATE COMMERCE

Vessels

In Gloucester Ferry Company _v._ Pennsylvania,[725] decided in 1885, the Court held inapplicable to a New Jersey corporation which was engaged solely in transporting pa.s.sengers across the Delaware River and entered Pennsylvania only to discharge and receive pa.s.sengers and freight, a statute which taxed the capital stock of all corporations doing business within the State. Such transactions, the Court held, were interstate commerce; nor were the company's vessels subject to taxation by Pennsylvania, their taxing _situs_ being in the company's home State.

The only property held by the company in Pennsylvania was the lease there of a wharf which could be taxed by the State according to its appraised value; and the State could also levy reasonable charges by way of tolls for the use of such facilities as it might itself furnish for the carrying on of commerce. This ruling rested on two earlier ones. In 1855, the Court had held that vessels registered in New York, owned by a New York corporation, and plying between New York City and San Francisco had the former city for their home port, and were not taxable by California where they remained no longer than necessary to discharge pa.s.sengers and freight;[726] and in 1877 it had sustained Keokuk, Iowa in charging tolls for the use by vessels plying the Mississippi of wharves owned by the munic.i.p.ality, said tolls being reasonable and not discriminatory as between interstate and intrastate commerce.[727] Today it is still the general rule as to vessels plying between ports of different States and engaged in the coastwise trade, that the domicile of the owner is deemed to be the _situs_ of the vessel for purposes of taxation,[728] unless the vessel has acquired actual _situs_ in another State, by continuous employment there, in which event it may be taxed there.[729] Recently, however, this long standing rule has been amended by the addition to it of the apportionment rule as developed in the Pullman case. This occurred in Ott _v._ Mississippi Barge Line Co.,[730]

decided in 1949, in which the Court sustained Louisiana in levying an _ad valorem_ tax on vessels owned by an interstate carrier and used within the State, the a.s.sessment for the tax being based on the ratio between the number of miles of the carrier's lines within the State and its total mileage.

Airplanes

When, however, it was confronted by an attempt on the part of the State of Minnesota to impose a personal property tax on the entire air fleet owned and operated by a company in interstate commerce although only a part of it was in the State on tax day, the Court found itself unable to recruit a majority for any of the above formulas.[731] Pointing to the fact that the company was a Minnesota corporation and that its princ.i.p.al place of business was located in the State, Justice Frankfurter for himself and three others wished to stress the prerogatives of the State of domicile.[732] Justice Black, concurring in this view, added the caveat that the taxing rights of other States should not be foreclosed and made reference to his "leave it to Congress" notion.[733] Justice Jackson, after speaking lightly of the apportionment theory,[734] joined the affirming brethren on the ground that the record seemed "to establish Minnesota as a 'home port' within the meaning of the old and somewhat neglected but to me wise authorities cited," to wit, the Hays case and those decided by a.n.a.logy to it.[735] Four Justices, speaking by Chief Justice Stone dissented, urging the Pullman Case[736] as an applicable model and the fact that "the rationale found necessary to support the present tax leaves other States free to impose comparable taxes on the same property."[737] Evidently in this area of Const.i.tutional Law the Court is still much at sea or better perhaps, "up in the air."

Motor Vehicles

In the matter of motor vehicle taxation, on the other hand, durable and consistent results have been achieved. This is because most such taxation has been readily cla.s.sifiable as the exaction of a toll for the use of the State's highways, and the only question was whether the toll was exorbitant. Moreover, such taxation is apt to be designed not merely to raise revenue but to promote safety on the highways. In the leading case, Hendrick _v._ Maryland,[738] decided in 1915, the Court took cognizance of the fact that "the movement of motor vehicles over the highways is attended by constant and serious dangers to the public, and is also abnormally destructive to the ways themselves";[739] and on this factual basis it has held that registration may be required by a State for out-of-State vehicles operated therein,[740] or pa.s.sing through from one State to another;[741] that a special fee may be exacted for the privilege of transporting motor vehicles on their own wheels in caravans,[742] unless excessive;[743] that taxes may also be imposed on carriers based on capacity[744] or mileage,[745] or as a flat fee;[746]

but that a privilege tax on motor busses operated exclusively in interstate commerce, cannot be sustained unless it appears affirmatively in some way, that it is levied only as compensation for use of the highways in the State or to defray the expense of regulating motor traffic.[747] Later decisions follow in the same general track,[748] the most recent one being Capitol Greyhound Lines _v._ Brice,[749] in which the Court, speaking by Justice Black pa.s.sed upon a Maryland excise tax on the fair market value of motor vehicles used in interstate commerce as a condition to the issuance of certificates of t.i.tle as prerequisites to the registration and operation of motor vehicles in the State.

Because the tax was applied to vehicles used in both interstate and intrastate commerce and the proceeds were used for road purposes and because the Court considered the tax, though actually separate, to be an adjunct of Maryland's mileage tax, it was able to find that the total charge varied substantially with the mileage travelled, and on that ground sustained it, being constant, it said with "rough approximation rather than precision," no showing having been made that Maryland's taxes considered as a whole exceeded "fair compensation for the privilege of using State roads." Justice Frankfurter, who was joined by Justice Jackson, dissented, and in so doing contributed as an Appendix to his opinion a useful a.n.a.lysis of decisions involving State taxation of motor vehicles engaged in interstate commerce, for highway purposes.[750]

Public Utilities; Regulatory Charges

"The principles governing decision [in this cla.s.s of cases] have repeatedly been announced and were not questioned below.[751] In the exercise of its police power the State may provide for the supervision and regulation of public utilities, such as railroads; may delegate the duty to an officer or commission; and may exact the reasonable cost of such supervision and regulation from the utilities concerned and allocate the exaction amongst the members of the affected cla.s.s without violating the rule of equality imposed by the Fourteenth Amendment.[752]

The supervision and regulation of the local structures and activities of a corporation engaged in interstate commerce, and the imposition of the reasonable expense thereof upon such corporation, is not a burden upon, or regulation of, interstate commerce in violation of the commerce clause of the Const.i.tution.[753] A law exhibiting the intent to impose a compensatory fee for such a legitimate purpose is _prima facie_ reasonable.[754] If the exaction be so unreasonable and disproportionate to the service as to impugn the good faith of the law[755] it cannot stand either under the commerce clause or the Fourteenth Amendment.[756]

The State is not bound to adjust the charge after the fact, but may, in antic.i.p.ation, fix what the legislature deems to be a fair fee for the expected service, the presumption being that if, in practice, the sum charged appears inordinate the legislative body will reduce it in the light of experience.[757] Such a statute may, in spite of the presumption of validity, show on its face that some part of the exaction is to be used for a purpose other than the legitimate one of supervision and regulation and may, for that reason, be void.[758] And a statute fair upon its face may be shown to be void and unenforceable on account of its actual operation.[759] If the exaction be clearly excessive it is bad _in toto_ and the State cannot collect any part of it."[760]

Dominance of Congress

The Supreme Court has never forgotten the lesson which was administered it by the act of Congress of August 31, 1852,[761] which p.r.o.nounced the Wheeling Bridge "a lawful structure," thereby setting aside the Court's determination to the contrary earlier the same year.[762] This lesson, stated in the Court's own language thirty years later, was, "It is Congress, and not the Judicial Department, to which the Const.i.tution has given the power to regulate commerce * * *."[763] A parallel to the Wheeling Bridge episode occurred in 1945.

THE McCARRAN ACT: REGULATION OF INSURANCE

Less than a year after the ruling in United States _v._ South-Eastern Underwriters a.s.sociation[764] that insurance transactions across State lines const.i.tuted interstate commerce, thereby logically establis.h.i.+ng their immunity from discriminatory State taxation, Congress pa.s.sed the McCarran Act[765] authorizing State regulation and taxation of the insurance business; and in Prudential Insurance Co. _v._ Benjamin,[766]

a statute of South Carolina which imposed on foreign insurance companies, as a condition of their doing business in the State, an annual tax of three per cent of premiums from business done in South Carolina, while imposing no similar tax on local corporations, was sustained. "Obviously," said Justice Rutledge for the Court, "Congress'

purpose was broadly to give support to the existing and future State systems for regulating and taxing the business of insurance. This was done in two ways. One was by removing obstructions which might be thought to flow from its own power, whether dormant or exercised, except as otherwise expressly provided in the Act itself or in future legislation. The other was by declaring expressly and affirmatively that continued State regulation and taxation of this business is in the public interest and that the business and all who engage in it 'shall be subject to' the laws of the several States in these respects. * * * The power of Congress over commerce exercised entirely without reference to coordinated action of the States is not restricted, except as the Const.i.tution expressly provides, by any limitation which forbids it to discriminate against interstate commerce and in favor of local trade.

Its plenary scope enables Congress not only to promote but also to prohibit interstate commerce, as it has done frequently and for a great variety of reasons. * * * This broad authority Congress may exercise alone, subject to those limitations, or in conjunction with coordinated action by the States, in which case limitations imposed for the preservation of their powers become inoperative and only those designed to forbid action altogether by any power or combination of powers in our governmental system remain effective."[767] The generality of this language enforces again the sweeping nature of Congress's power to prohibit interstate commerce.[768]

The Police Power and Foreign Commerce

ORIGIN OF POLICE POWER

In Gibbons _v._ Ogden[769] cognizance was taken of the existence in the States of an "immense ma.s.s" of legislative power to be used for the protection of their welfare and the promotion of local interests.[770]

In Marshall's opinion in Brown _v._ Maryland[771] this power is christened "the Police Power," a name which has since come to supply one of the great t.i.tles of Const.i.tutional Law. Counsel for Maryland had argued that if the State was not permitted to _tax_ imports in the original package before they left the hands of the importer, it would also be unable to prevent their introduction into its midst although they might comprise articles dangerous to the public health and safety.

"The power to direct the removal of gunpowder," the Chief Justice answered, "is a branch of the police power, which unquestionably remains, and ought to remain, with the States;" and the power to direct "the removal or destruction of infectious or unsound articles" fell within the same category.[772]

STATE CURBS ON ENTRY OF FOREIGNERS

In short, the power to tax was one thing, the police power something quite different. To concede the former would be to concede a power which could be exercised to any extent and at the will of its possessor;[773]

to concede the latter was to concede a power which was limited of its own inherent nature to certain necessary objectives. In New York _v._ Miln,[774] however, the Court which came after Marshall inclined toward the notion of a power of internal police which was also unlimited; and on this ground upheld a New York statute which required masters of all vessels arriving at the port of New York to make reports as to pa.s.sengers carried, and imposed fines for failure to do so. "We are of opinion," the Court said, "that the act is not a regulation of commerce, but of police." But, when New York, venturing a step further, pa.s.sed an act to authorize State health commissioners to collect certain fees from captains arriving in ports of that State, and when Ma.s.sachusetts enacted a statute requiring captains of s.h.i.+ps to give bonds as to immigrants landed, both measures were p.r.o.nounced void, either as conflicting with treaties and laws of the United States or as invading the "exclusive"

power of Congress to regulate foreign commerce.[775] Following the Civil War, indeed, New York _v._ Miln was flatly overruled, and a New York statute similar to the one sustained in 1837 was p.r.o.nounced void as intruding upon Congress's powers.[776] Nothing was gained, said the Court, by invoking "[the police power] * * *, it is clear, from the nature of our complex form of government, that, whenever the statute of a State invades the domain of legislation which belongs exclusively to the Congress of the United States, it is void, no matter under what cla.s.s of powers it may fall, or how closely allied to powers conceded to belong to the States."[777] At the same time a California statute requiring a bond from s.h.i.+powners as a condition precedent to their being permitted to land persons whom a State commissioner of immigration might choose to consider as coming within certain enumerated cla.s.ses, e.g., "debauched women," was also disallowed. Said the Court: "If the right of the States to pa.s.s statutes to protect themselves in regard to the criminal, the pauper, and the diseased foreigner, landing within their borders, exists at all, it is limited to such laws as are absolutely necessary for that purpose; and this mere police regulation cannot extend so far as to prevent or obstruct other cla.s.ses of persons from the right to hold personal and commercial intercourse with the people of the United States."[778]

STATE QUARANTINE LAWS

On the other hand, it has been repeatedly held that the States may, in the absence of legislation by Congress, enact quarantine laws, even though in effect they thereby regulate foreign commerce; and furthermore that such legislation may be, in the interest of effective enforcement, applied beyond the mere exclusion of diseased persons. Thus in the leading case the State of Louisiana was sustained in authorizing its Board of Health in its discretion to prohibit the introduction into any infected portion of the State of "persons acclimated, unacclimated or said to be immune, when in its judgment the introduction of such persons would add to or increase the prevalence of the disease."[779] At the same time it was emphasized that all such legislation was subject to be supplanted by Congress at any time.

STATE GAME PROTECTION AND FOREIGN COMMERCE

The Court's tolerance of legal provisions which might not standing alone be const.i.tutional, when they are designed to make legislation within the police power practically enforceable, is also ill.u.s.trated in connection with State game laws. In the case of Silz _v._ Hesterberg[780] the Court was confronted with a New York statute establis.h.i.+ng a closed season for certain game, during which season it was a penal offense to take or possess any of the protected animals, fish or birds; and providing farther that the ban should equally apply "to such fish, game or flesh coming from without the State as to that taken within the State." This provision was held to have been validly applied in the case of a dealer in imported game who had in his possession during the closed season "one dead body of an imported grouse, ..., and taken in Russia." Again the absence of conflicting legislation by Congress was adverted to.[781]

The Police Power and Interstate Commerce

GENERAL PRINCIPLES

In Southern Pacific Co. _v._ Arizona,[782] decided in 1945, Chief Justice Stone made the following systematic statement of principles which have guided the Court in the exercise of its power of judicial review of State legislation affecting interstate commerce: "Although the commerce clause conferred on the national government power to regulate commerce, its possession of the power does not exclude all state power of regulation. Ever since Willson _v._ Black-Bird Creek Marsh Co., 2 Pet. 245, and Cooley _v._ Board of Wardens, 12 How. 299, it has been recognized that, in the absence of conflicting legislation by Congress, there is a residuum of power in the state to make laws governing matters of local concern which nevertheless in some measure affect interstate commerce or even, to some extent, regulate it.[783] Thus the states may regulate matters which, because of their number and diversity, may never be adequately dealt with by Congress.[784] When the regulation of matters of local concern is local in character and effect, and its impact on the national commerce does not seriously interfere with its operation, and the consequent incentive to deal with them nationally is slight, such regulation has been generally held to be within state authority.[785]

"But ever since Gibbons _v._ Ogden, 9 Wheat. 1, the states have not been deemed to have authority to impede substantially the free flow of commerce from state to state, or to regulate those phases of the national commerce which, because of the need of national uniformity, demand that their regulation, if any, be prescribed by a single authority.[786] Whether or not this long-recognized distribution of power between the national and the state governments is predicated upon the implications of the commerce clause itself,[787] or upon the presumed intention of Congress, where Congress has not spoken,[788] the result is the same.

"In the application of these principles some enactments may be found to be plainly within and others plainly without state power. But between these extremes lies the infinite variety of cases, in which regulation of local matters may also operate as a regulation of commerce, in which reconciliation of the conflicting claims of state and national power is to be attained only by some appraisal and accommodation of the competing demands of the state and national interests involved.[789]

"For a hundred years it has been accepted const.i.tutional doctrine that the commerce clause, without the aid of Congressional legislation, thus affords some protection from state legislation inimical to the national commerce, and that in such cases, where Congress has not acted, this Court, and not the state legislature, is under the commerce clause the final arbiter of the competing demands of state and national interests.[790]

"Congress has undoubted power to redefine the distribution of power over interstate commerce. It may either permit the states to regulate the commerce in a manner which would otherwise not be permissible,[791] or exclude state regulation even of matters of peculiarly local concern which nevertheless affect interstate commerce.[792]

"But in general Congress has left it to the courts to formulate the rules thus interpreting the commerce clause in its application, doubtless because it has appreciated the destructive consequences to the commerce of the nation if their protection were withdrawn,[793] and has been aware that in their application state laws will not be invalidated without the support of relevant factual material which will 'afford a sure basis' for an informed judgment.[794] Meanwhile, Congress has accommodated its legislation, as have the states, to these rules as an established feature of our const.i.tutional system. There has thus been left to the states wide scope for the regulation of matters of local state concern, even though it in some measure affects the commerce, provided it does not materially restrict the free flow of commerce across state lines, or interfere with it in matters with respect to which uniformity of regulation is of predominant national concern."

State Regulation of Agencies of Interstate Commerce

RAILWAY RATE REGULATION

In one of the Granger Cases decided in 1877 the Court upheld the power of the legislature of Wisconsin in the absence of legislation by Congress, to prescribe by law the maximum charges to be made by a railway company for fare and freight upon the transportation of persons and property within the State, or taken up outside the State and brought within it, or taken up inside and carried without it.[795] Ten years later, in Wabash, St. Louis and Pacific Railway Co. _v._ Illinois[796]

this decision was reversed as to persons and property taken up within the State and transported out of it and as to persons and property brought into the State from outside. As to these, the Court held that the regulation of rates and charges must be uniform and that, therefore, the States had no power to deal with the subject even when Congress had not acted. The following year Congress pa.s.sed the Interstate Commerce Act[797] to fill the gap created by the Wabash decision. Today, the States still exercise the power to regulate railway rates for the carriage of persons and property taken up and put down within their borders, but do so subject to the rule, which is enforced by the Interstate Commerce Commission, that such rates may not discriminate against interstate commerce.[798]